FTC’s ‘Duty of Inquiry’ for Non-Marketers Gets a Judicial Boost

Written by William I. Rothbard on Wednesday, July 10th, 2013

June was a banner month for the Federal Trade Commission’s (FTC) aggressive campaign to hold non-marketers liable for the misdeeds of their marketing clients. No sooner had the ink dried on last month’s post in this space describing the FTC’s efforts to expand the liability orbit than the agency announced its latest action against a merchant processor, followed by another processor suit and a federal appeals court’s affirmance of an FTC judgment against a product developer who had no involvement in the marketing of her products. As icing on the cake, the FTC also returned nearly $600,000 to consumers under a settlement with Landmark Clearing Inc., another processor accused of aiding deception.

All three actions involve phone sales covered by the Telemarketing Sales Rule (TSR), including its provision imposing liability on anyone who provides “substantial assistance” to a seller-telemarketer while knowing, or “consciously avoiding” knowing, it is engaged in unlawful conduct. In the processor actions, both asserting fraud in credit card debt relief programs, the FTC amended complaints it had originally filed only against the telemarketers to add their processors. Named, respectively, were Independent Resources Network Corp. (IRN) in FTC v. Innovative Wealth Builders Inc. et al., and Newtek Merchant Solutions in FTC v. WV Universal Management, LLC d.b.a. Treasure Your Success et al.

Both are charged with being on notice that telemarketing in general – and debt relief services in particular – are high-risk areas, creating a duty of inquiry, and then breaching that duty by ignoring red flags of fraud or failing even to look and see what color they might be. In the case of IRN, it allegedly knew or consciously avoided knowing that Innovative Wealth Builders (IWB) was a telemarketing company offering debt relief services and had an “F” rating with the BBB. It further allegedly ignored “alarmingly high chargeback rates,” knew that MasterCard had tagged IWB as a “high” fraud risk, and was aware of IWB investigations by the FTC and state of Florida, yet continued processing. Similarly, Newtek allegedly knew Treasure Your Success (TYS) was selling debt relief services through telemarketing, yet violated its own due diligence procedures by failing to review TYS’ scripts, and was aware of substantial chargeback rates and placement of TYS in MasterCard’s monitoring program, yet kept processing.

Based on these allegations, anyone providing “substantial assistance” to sellers/telemarketers has a “duty to inquire” and to be on “high alert,” not only from empirical evidence of possible fraud, such as excessive chargebacks, but from the mere fact that the seller is engaged in telemarketing (or “suspect” verticals, such as debt relief, business opportunities or weight loss). From that moment of awareness, substantial FTC risk attaches – a risk that can only increase with time if the assisting party ignores warning signs and stays in the relationship.

Under a new appellate ruling, the same now holds true not only for key infrastructure vendors like processors, but also for product creators who also play no role in marketing activities. In FTC v. Meggie Chapman et al., the Tenth Circuit Court of Appeals upheld an FTC judgment against a grant writer whose materials were sold through a grant-related telemarketing program. Dismissing Chapman’s defense that she did not provide “substantial assistance” because she had no part in the misleading marketing, the court held her liable because she still was an “integral part” of the telemarketing scheme and knew or consciously avoided knowing it was deceptive.

Her part was integral, the court said, because she had produced the grant materials, and she met the “conscious avoidance” test because she: 1) was aware of a state attorney general’s investigation of the business and request that it change its marketing, yet she never asked to see the marketing materials; 2) was aware a success rate claim for one of her products was not substantiated; and 3) had been advised by a former employee of the company to be vigilant about monitoring its marketing. On the “substantial assistance” prong of liability, the court said it is “sufficient that Ms. Chapman played an integral part in the … scheme by providing the services and products they marketed to consumers.”

Product developers, manufacturers and service providers everywhere: take heed that under Chapman, you now face possible FTC liability for deceptive marketing even if you play no role in the marketing but nevertheless become aware of some reason to think it could be deceptive and remain indifferent to what you see. You, like processors, could now have a duty of inquiry, too.